What are Fix and Flip Bridge Loans?
Fix and flip bridge loans, also known by real estate investors as bridge financing, or gap financing, are short term loans (typically 6 to 24 months in duration) offered by hard money lenders to help finance the purchase and renovation of investment properties. Some hard money lenders offer a special bridge loan product that allows a borrower to compete for cash-only deals and "close as cash" on a property purchase. Bridge loan funds can also be used to bridge the gap between fix and flip project completion and the sale of the property—covering the project’s holding costs while the renovated investment property awaits a buyer or the investor seeks refinancing.
The Benefits of Bridge Loans During the Covid-19 Crisis
Due to the economic uncertainty that accompanies this kind of crisis, some fix and flip investors are choosing to either pause operations for the foreseeable future, or scale back significantly. Other house flippers see an opportunity presented by low housing inventory and the lowest mortgage rates in history. These investors know they are filling a specific need in these tough times by bringing like-new housing options to the market for eager home buyers—many of whom are finding extremely limited inventory and no new construction in their local real estate markets.
For fix and flip investors who are continuing to operate during the Covid-19 crisis, fix and flip bridge loans can provide a viable cash flow solution and serve as a buffer against unforeseen problems related to the coronavirus.
How to Qualify for Fix and Flip Bridge Financing
Before the Covid-19 crisis, fix and flip bridge loans were approved mainly based on the value of the property. Credit score, financial history, and a borrowers' experience and success with past flips has always been taken into account to some degree by hard money lenders, but these considerations will likely affect borrower approval more significantly now.
Some hard money lenders have opted to discontinue lending to first-time flippers, others are scaling back or pausing their refinance loan programs. These decisions are based on the perceived risk in the market, and borrowers should be prepared to find that bridge loan underwriting standards have become a bit tighter than they were before the pandemic.
If you have many successful flips under your belt and your bank statements confirm your ability to make interest payments on your loan, a low credit score may not be a deal-breaker for your lender. It’s important to reach out and communicate with your lender to discuss any changes to their bridge loan qualifications that might impact your business goals.
Bridge Loans Fund Fast
One of the best benefits of fix and flip bridge loans is that, unlike traditional commercial loans that typically take weeks to fund, most bridge loan borrowers can expect to receive funds from their hard money lenders in 5 to 10 days (possibly faster, depending on the lender).
Covid-19 Might Impact Your Lender’s Rates and Terms
The financial markets have taken a beating during this crisis, and lenders are assessing their risk and making adjustments to their loan programs accordingly. Fix and flip investors who have been using bridge loans for many years are discovering that Covid-19 has impacted the interest rates and terms of these loans. It is important to be aware of any changes your lender has made to their bridge loan program and be prepared for how your business might be impacted.
Unprecedented economic challenges are facing us, but the good news for real estate investors is hard money lenders are continuing to provide capital to support the business goals of fix and flip investors.